The PPI dilemma
Francis Higney looks at the trials and tribulations of the PPI industry as Lloyds stops selling the products ahead of imminent tighter controls
The Competition Commission (CC) should have finalised its report into the Payment Protection Insurance (PPI) market by the time you read this, but the ongoing uncertainty has been enough for Lloyds Banking Group to pull the plug on this product.
Last month it decided to stop selling policies to new customers alongside Lloyds TSB, Halifax, Bank of Scotland, C&G and Black Horse personal loans, credit cards and mortgages. Lloyds will honour all PPI applications on loans and credit cards until 31 July, and all mortgage applications until 20 November but it won't take new applications.
A spokesperson said that “further changes in regulation will make it uneconomic to continue to offer these products in their current form”.
MoneySavingExpert.com creator and television finance guru Martin Lewis described the move as “astonishing” and hoped other lenders would follow suit.
Traditionally these policies have been a cash cow for lenders as it was the case until recently that lenders could safeguard their clients by arranging cover at the time a mortgage or loan was agreed. However, that all changed with the CC ruling in a seven-day cooling off period before purchase and banning single premium PPI.
Lloyds has promised not to raise loan and credit card rates to replace lost PPI income. HSBC stopped selling PPI as a standalone product in 2007. Royal Bank of Scotland and NatWest only offer the cover with mortgages and loans of between £25,000 and £35,000, while Nationwide also only offers it with mortgages. Barclays is in the process of phasing out the sale of the cover.
Regulation
Recent history has not been kind to creditor insurance sector with the Office of Fair Trading, Competition Commission and Financial Service Authority investigations into this cover.
Lenders have borne the brunt of regulators' displeasure and the decision was taken last year, in the name of competition and consumer protection, to ban banks and building societies from selling PPI at the same time as another financial product.
The Association of British Insurers declared itself “very disappointed” with the original CC decision. The Council of Mortgage Lenders (CML) is also concerned.
"If, when future requirements for selling MPPI are published, they are in line with the CC proposals it will become more complicated for lenders and intermediaries to sell. The possible unintended consequence of excessive regulation is that nobody will buy it," said a CML spokesperson.
Aviva is a major underwriter of PPI insurance. Research carried out by the company found that 80 per cent of customers, who didn’t buy at the point of sale, were unlikely to purchase the cover within the next 12 months.
Tom Spink, director of creditor at Aviva says: “We believe that by bringing in a point of sale (POS) ban significant numbers of people will be left without the protection of PPI.”
Intermediaries
The controversy has sparked interest in seeking alternative means for lenders to bring these products to market. One obvious route would be through insurance and mortgage brokers. Broker trade body BIBA believes its members “have an opportunity to play a major part in shaping the way this type of protection is sold” and suggests the POS ban is not extended to cover situations where lenders work with retained brokers.
Paymentshield is the biggest seller of MPPI products through the intermediary channel. Chief executive Tim Johnson says: “There is an undoubted need for these products but we need to give control back to the customer. That means letting them decide how best to direct the benefits accrued - mortgage, rent, loan repayment, school fees, and such like and having no age limit on the claim and to ensure that this necessary cover is open to the self employed.”
New era of income protection
Aviva is investing substantially in developing a new regular premium product which will be ready by the end of this year. One of the key differences is that the amount of benefit is based on the customer’s income rather than their credit repayment. Additionally the product can be flexed over the lifetime of the policy so cover can change to suit the individual's changing circumstances.
Paymentshield is another provider that is bringing a more flexible product to the market as soon as the end of this month. It has been a big player in the Mortgage Payment Protection Insurance space using mortgage intermediaries. Its new product promises to be much more flexible providing income protection for most kinds of householder expenditure, including mortgages. It will be suitable for all life stages with the customer in control of how benefit should be used and is designed to protect and maintain the policyholder's lifestyle. Crucially Paymentshield predicts providing a quotation in two minutes with underwriting at point of sale.
LV= has changed its Mortgage & Lifestyle Protection (MLP) product to include a new low rate band for those in lower risk occupations. It has also introduced a ‘Mortgage Guarantee' to its MLP cover.
Francis Higney is a freelance journalist and PR specialist
